There has been a lot of talk lately about converging U.S. and international generally accepted accounting principles.For example, Accounting Today (Oct. 11-24, 2004, page 3) reported that Sen. Richard Shelby R-Ala., held a hearing on the topic in the fall. Among those testifying was Sir David Tweedie, the International Accounting Standards Board chairman, who was paraphrased by the writer as saying: "Convergence of the standards developed by his group and FASB's ... would be a development of 'immense significance' for improving financial reporting throughout the world."

In addition, Bob Herz, chair of the Financial Accounting Standards Board, was quoted in an October press release as saying, "FASB is committed to working toward the goal of producing high-quality reporting standards worldwide to support healthy global capital markets. ... Our agreement provides a clear path forward for working together to achieve our common goal."

His comment refers to what is known as the "Norwalk Agreement" that was worked out in a joint meeting in September. The compact (which can be found at said that the two boards "each acknowledged their commitment to the development of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. At that meeting, both FASB and the IASB pledged to use their best efforts to (a) make their existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained."

Sir David was also quoted in the same press release: "I am extremely confident now that we can eliminate major differences between national and international standards, and by drawing on the best of U.S. GAAP, international financial reporting standards and other national standards, the world's capital markets will have a set of global accounting standards that investors can trust."

Of course, now and again all parades, including this one, need to get rained on.

As we see it, the march to convergence is more than a little like what happened 20 years ago when the Auditing Standards Board set out to close the "expectations gap" between what the capital markets were expecting from auditors and what the auditors were delivering. The project started with similar positive language, promising to meet the markets' needs.

As time passed and events unfolded, however, the promises turned hollow. What everyone recognized when the standards came out was that the ASB's solution was to try to lower expectations down to what was already being done, instead of raising performance to meet expectations. In effect, the focus on the end of more useful financial reporting was lost when the auditors decided to protect the status quo by not really modifying the means to that end.

We counsel the two boards against falling prey to the same syndrome as they pursue convergence. The goal must not be simply to achieve convergence for its own sake. Significant progress will not come if the scope of the project is limited to Sir David's vision for "drawing on the best" of U.S. and international standards. As we demonstrated in our most recent column, virtually everything in GAAP amounts to either telling something other than the whole truth or not telling the truth at all. This situation is, we think, the outcome of decades of allowing accountants to frame and then politically resolve financial reporting issues from the point of view of what is convenient and good for themselves, whether they work as auditors or statement preparers. We have, in fact, seen little or nothing in the IASB's process or output that makes us think that its standards are different in this respect.

Simply put, if the goal of Quality Financial Reporting is not passionately and resolutely pursued, convergence between two sets of standards will not accomplish much that's worthwhile. Going in that direction will simply be convergence to have convergence, and the means will have been elevated above the end.

What's needed instead is joint convergence on new standards by divergence away from the politically compromised standards that both boards have already adopted. The end must be more efficient capital markets through more useful and more complete information, and the means is convergence of all standards on new practices that will produce that information.

It will do absolutely no good to converge on today's compromised and otherwise mediocre standards. Indeed, we're convinced that the current brand of convergence will not just fail to produce better accounting, but will inhibit the development of truly high-quality new standards. Once labor and political capital are sunk into getting mere convergence, no one will want to rock the boat by daring to bring entirely new solutions to bear on the problems. Yet it is entirely new solutions that are needed.

In the Accounting Today article, Sir David cited his board's moves to emulate FASB by eliminating poolings of interest and the amortization of goodwill. He also mentions FASB's move to require expensing stock options and achieve congruence with the IASB's standard. These examples exemplify what we fear. In the eyes of standard-setters and others, these issues are now resolved, and it will be years before they're ever reconsidered.

But how much better would it have been if both boards had worked together to question any financial reporting for combinations that fails to provide complete market-based information about the assets and liabilities of both the acquirer and the acquired? How much better would it have been for both boards to require an accounting for goodwill that reports all changes in value, instead of only impairment losses? And how much better would it have been if they had both converged on an accounting method that treats options as highly volatile derivative liabilities that always produce costs greatly different from the grant-date value?

Alas, now that FASB and the IASB have moved to common mediocre methods, neither will be interested in revisiting the issues to find better solutions to replace these inferior compromises.

Lest anyone misunderstand, we're all in favor of international harmony in accounting standards, and we think convergence is a good idea. However, where our thinking differs is that we see standards as minimums that define the absolute least that managers must do.

Unfortunately, the attitude of standard-setters, auditors, managers and regulators is that standards instead define the maximum that anyone must do, and that no one can be faulted for failing to go above and beyond the politically compromised rules to actually tell the truth, the whole truth and nothing but the truth.

As a matter of fact, once there is convergence on the minimum standards, we wholeheartedly endorse complete divergence among managers who are seeking lower capital costs by voluntarily providing additional useful information that reduces uncertainty for investors. We're willing to let the capital markets provide their own rewards to managers who publish superior supplemental information, while imposing their own penalties for those who don't. All this discipline would be above and beyond that meted out by regulators for failing to meet minimum standards.

So, here we are at the same point we often reach, calling for a paradigm shift toward looking at issues from the perspective of those who demand reports instead of those who supply them. Until standard-setters choose to serve only users' needs, convergence will be nothing but an empty exercise that wastes the irreplaceable time and efforts of a great many highly talented individuals around the world, and what a shame that is.

Paul B.W. Miller is a professor at the University of Colorado at Colorado Springs, and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions. Reach them at

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